Edgar Filing: Wendy's Co

TWC_WR 10Q Q2 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(X)		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2011



( )		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission file number: 1-2207

THE WENDY’S COMPANY

(Exact name of registrants as specified in its charter)



Delaware		38-0471180
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1155 Perimeter Center West, Atlanta, GA		30338
(Address of principal executive offices)		(Zip Code)

(678) 514-4100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,

if changed since last report)

Commission file number: 333-161613

WENDY’S RESTAURANTS, LLC

(Exact name of registrants as specified in its charter)



Delaware		38-0471180
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1155 Perimeter Center West, Atlanta, GA		30338
(Address of principal executive offices)		(Zip Code)

(678) 514-4100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



The Wendy’s Company	Yes [x] No [ ]
Wendy’s Restaurants, LLC	Yes [ ] No [x]*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



The Wendy’s Company	Yes [x] No [ ]
Wendy’s Restaurants, LLC	Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

The Wendy’s Company

Large accelerated filer [x] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]

Wendy’s Restaurants, LLC

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x] Smaller reporting company [ ]

Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [x]

There were 396,140,434 shares of The Wendy’s Company common stock outstanding as of August 5, 2011.

Wendy’s Restaurants, LLC meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with reduced disclosure format.

* Wendy’s Restaurants, LLC has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period it was required to file such reports.

Explanatory Note

This Quarterly Report on Form 10-Q is a combined report being filed separately by The Wendy’s Company (“The Wendy’s Company”) and Wendy’s Restaurants, LLC (“Wendy’s Restaurants”), a direct 100% owned subsidiary holding company of The Wendy’s Company. Unless the context indicates otherwise, any reference in this report to the “Companies,” “we,” “us,” and “our” refers to The Wendy’s Company together with its direct and indirect subsidiaries, including Wendy’s Restaurants. Each registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information. Until July 5, 2011, The Wendy’s Company was known as Wendy’s/Arby’s Group, Inc. and Wendy’s Restaurants was known as Wendy’s/Arby’s Restaurants, LLC.

Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined in this Quarterly Report on Form 10-Q. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation. In addition, separate financial statements for each company are included in Part I Item 1, “Financial Statements.”

The principal subsidiaries of Wendy’s Restaurants for the periods covered in this Quarterly Report on Form 10-Q are Wendy’s International, Inc. (“Wendy’s”) and Arby’s Restaurant Group, Inc. (“Arby’s”) and their subsidiaries. On July 4, 2011, Wendy’s Restaurants sold 100% of the common stock of Arby’s for cash and an indirect 18.5% interest in Arby’s (see Note 2 - Discontinued Operations for additional information regarding the sale of Arby’s). As a result, substantially all of the continuing operating results of The Wendy’s Company are derived from the operating results of Wendy’s and its subsidiaries.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

INDEX TO FORM 10-Q



	Page
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements	5
The Wendy’s Company and Subsidiaries
Condensed Consolidated Balance Sheets as of July 3, 2011 and January 2, 2011	5
Condensed Consolidated Statements of Income for the three months and six months ended July 3, 2011 and July 4, 2010	6
Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2011 and July 4, 2010	6
Wendy’s Restaurants, LLC and Subsidiaries
Condensed Consolidated Balance Sheets as of July 3, 2011 and January 2, 2011	8
Condensed Consolidated Statements of Income for the three months and six months ended July 3, 2011 and July 4, 2010	9
Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2011 and July 4, 2010	9
The Wendy’s Company and Subsidiaries and Wendy’s Restaurants, LLC and Subsidiaries
Combined Notes to Condensed Consolidated Financial Statements	11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures about Market Risk	55
Item 4. Controls and Procedures	55

Part II: OTHER INFORMATION	56
Item 1. Legal Proceedings	57
Item 1A. Risk Factors	58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 4. (Removed and Reserved)	58
Item 6. Exhibits	59
Signatures	61

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)



	July 3, 2011			January 2, 2011
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	492,448		$	512,508
Accounts and notes receivable	70,962			84,258
Inventories	13,164			22,694
Prepaid expenses and other current assets	42,156			24,386
Deferred income tax benefit	62,998			34,389
Advertising funds restricted assets	74,472			76,553
Current assets of discontinued operations	66,325			—
Total current assets	822,525			754,788
Properties	1,141,675			1,551,261
Goodwill	872,366			883,644
Other intangible assets	1,318,242			1,358,574
Investments	110,785			107,223
Deferred costs and other assets	67,184			77,164
Noncurrent assets of discontinued operations	418,855			—
Total assets	$	4,751,632		$	4,732,654

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	8,180		$	18,415
Accounts payable	70,964			81,361
Accrued expenses and other current liabilities	191,966			245,157
Advertising funds restricted liabilities	74,472			76,553
Current liabilities of discontinued operations	110,912			—
Total current liabilities	456,494			421,486
Long-term debt	1,346,640			1,553,987
Deferred income	18,810			11,460
Deferred income taxes	445,897			412,293
Other liabilities	110,658			170,254
Noncurrent liabilities of discontinued operations	245,711			—
Commitments and contingencies
Stockholders’ equity:
Common stock	47,042			47,042
Additional paid-in capital	2,776,948			2,771,126
Accumulated deficit	(419,390		)	(412,464		)
Common stock held in treasury, at cost	(292,067		)	(249,547		)
Accumulated other comprehensive income	14,889			7,017
Total stockholders’ equity	2,127,422			2,163,174
Total liabilities and stockholders’ equity	$	4,751,632		$	4,732,654

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands Except Per Share Amounts)



	Three Months Ended						Six Months Ended
	July 3, 2011			July 4, 2010			July 3, 2011			July 4, 2010
	(Unaudited)
Revenues:
Sales	$	544,237		$	532,411		$	1,053,523		$	1,045,158
Franchise revenues	78,222			75,023			151,401			146,990
	622,459			607,434			1,204,924			1,192,148
Costs and expenses:
Cost of sales	464,798			442,314			903,669			873,651
General and administrative	74,456			74,081			149,141			156,421
Retention program and other transaction related costs	5,039			—			6,923			—
Depreciation and amortization	29,842			31,381			60,156			63,813
Impairment of long-lived assets	365			482			8,262			482
Other operating expense, net	525			229			1,322			1,173
	575,025			548,487			1,129,473			1,095,540
Operating profit	47,434			58,947			75,451			96,608
Interest expense	(28,089		)	(29,516		)	(57,531		)	(60,581		)
Loss on early extinguishment of debt	—			(26,197		)	—			(26,197		)
Investment income, net	148			5,048			185			5,177
Other income, net	189			885			405			1,953
Income from continuing operations before income taxes	19,682			9,167			18,510			16,960
Provision for income taxes	(8,308		)	(3,725		)	(7,432		)	(4,207		)
Income from continuing operations	11,374			5,442			11,078			12,753
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes	3,672			5,300			2,559			(5,411		)
Loss on disposal of discontinued operations, net of income tax benefit	(3,780		)	—			(3,780		)	—
Net (loss) income from discontinued operations	(108		)	5,300			(1,221		)	(5,411		)
Net income	$	11,266		$	10,742		$	9,857		$	7,342

Basic and diluted income (loss) per share:
Continuing operations	$	.03		$	.02		$	.03		$	.03
Discontinued operations	—			.01			(.01		)	(.01		)
Net income	$	.03		$	.03		$	.02		$	.02

Dividends per share:	$	.02		$	.015		$	.04		$	.03

See accompanying notes to condensed consolidated financial statements.

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



	Six Months Ended
	July 3, 2011			July 4, 2010
	(Unaudited)
Cash flows from operating activities:
Net income	$	9,857		$	7,342
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	82,269			91,270
Net receipt of deferred vendor incentives	19,764			19,676
Impairment of long-lived assets	9,820			14,015
Share-based compensation provision	6,660			6,651
Distributions received from joint venture	6,501			5,793
Accretion of long-term debt	4,163			11,015
Non-cash rent expense	4,114			4,945
Deferred income tax provision (benefit), net	3,601			(4,053		)
Write-off and amortization of deferred financing costs	3,509			8,846
Provision for doubtful accounts	1,568			3,576
Operating investment adjustments, net (see below)	(145		)	(5,122		)
Equity in earnings in joint ventures, net	(5,100		)	(4,480		)
Other, net	(1,498		)	36
Changes in operating assets and liabilities:
Accounts and notes receivable	(5,575		)	(7,016		)
Inventories	(750		)	616
Prepaid expenses and other current assets	(12,147		)	(7,462		)
Accounts payable	14,604			(14,006		)
Accrued expenses and other current liabilities	(8,616		)	(29,352		)
Net cash provided by operating activities	132,599			102,290
Cash flows from investing activities:
Capital expenditures	(55,966		)	(52,730		)
Business acquisitions	(6,613		)	—
Investment activities, net (see below)	(828		)	32,187
Proceeds from dispositions	2,565			4,111
Other, net	(208		)	67
Net cash used in investing activities	(61,050		)	(16,365		)
Cash flows from financing activities:
Proceeds from long-term debt	—			497,661
Repayments of long-term debt	(34,768		)	(466,362		)
Proceeds from stock option exercises	3,340			1,030
Repurchases of common stock	(37,400		)	(173,537		)
Dividends paid	(16,750		)	(12,989		)
Deferred financing costs	(36		)	(14,375		)
Other, net	(119		)	(430		)
Net cash used in financing activities	(85,733		)	(169,002		)
Net cash used in operations before effect of exchange rate changes on cash	(14,184		)	(83,077		)
Effect of exchange rate changes on cash	1,200			(262		)
Net decrease in cash and cash equivalents	(12,984		)	(83,339		)
Cash and cash equivalents at beginning of period	512,508			591,719
Cash and cash equivalents at end of period	$	499,524		$	508,380

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(In Thousands)



	Six Months Ended
	July 3, 2011			July 4, 2010
	(Unaudited)
Detail of cash and cash equivalents at end of period:
Cash and cash equivalents of continuing operations	$	492,448		$	508,380
Cash and cash equivalents of discontinued operations	7,076			—
	$	499,524		$	508,380

Detail of cash flows related to investments:
Operating investment adjustments, net:
Income on collection of DFR Notes	$	—		$	(4,909	)
Other net recognized gains	(145		)	(213		)
	$	(145	)	$	(5,122	)
Investment activities, net:
Proceeds from sales of investments	$	355		$	1,435
Proceeds from repayment of DFR Notes	—			30,752
Investment in international joint venture	(1,183		)	—
	$	(828	)	$	32,187
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	61,050		$	67,665
Income taxes, net of refunds	$	7,018		$	10,845

Supplemental non-cash investing and financing activities:
Total capital expenditures	$	57,055		$	56,337
Cash capital expenditures	(55,966		)	(52,730		)
Non-cash capitalized lease and certain sales-leaseback obligations	$	1,089		$	3,607

See accompanying notes to condensed consolidated financial statements.

Table of Contents

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)



	July 3, 2011			January 2, 2011
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	222,753		$	198,686
Accounts and notes receivable	70,052			83,352
Inventories	13,164			22,694
Prepaid expenses and other current assets	32,789			24,032
Deferred income tax benefit	43,276			45,067
Advertising funds restricted assets	74,472			76,553
Current assets of discontinued operations	66,325			—
Total current assets	522,831			450,384
Properties	1,141,567			1,541,853
Goodwill	877,643			888,921
Other intangible assets	1,318,242			1,358,574
Investments	106,195			102,406
Deferred costs and other assets	66,245			74,559
Noncurrent assets of discontinued operations	418,855			—
Total assets	$	4,451,578		$	4,416,697

LIABILITIES AND INVESTED EQUITY
Current liabilities:
Current portion of long-term debt	$	6,881		$	17,047
Accounts payable	61,074			81,148
Accrued expenses and other current liabilities	194,277			244,300
Advertising funds restricted liabilities	74,472			76,553
Current liabilities of discontinued operations	110,912			—
Total current liabilities	447,616			419,048
Long-term debt	1,336,055			1,542,684
Due to parent	24,603			30,808
Deferred income	18,810			11,460
Deferred income taxes	476,029			478,472
Other liabilities	97,831			157,595
Noncurrent liabilities of discontinued operations	245,711			—
Commitments and contingencies
Invested equity:
Member interest, $0.01 par value; 1,000 shares authorized, one share issued and outstanding	—			—
Other capital	2,429,621			2,423,459
Accumulated deficit	(485,586		)	(499,500		)
Advances to parent	(155,000		)	(155,000		)
Accumulated other comprehensive income	15,888			7,671
Total invested equity	1,804,923			1,776,630
Total liabilities and invested equity	$	4,451,578		$	4,416,697

See accompanying notes to condensed consolidated financial statements.

Table of Contents

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands)



	Three Months Ended						Six Months Ended
	July 3, 2011			July 4, 2010			July 3, 2011			July 4, 2010
	(Unaudited)
Revenues:
Sales	$	544,237		$	532,411		$	1,053,523		$	1,045,158
Franchise revenues	78,222			75,023			151,401			146,990
	622,459			607,434			1,204,924			1,192,148
Costs and expenses:
Cost of sales	464,798			442,314			903,669			873,651
General and administrative	72,702			72,228			144,641			152,846
Retention program and other transaction related costs	4,692			—			5,971			—
Depreciation and amortization	29,783			30,915			59,632			62,881
Impairment of long-lived assets	365			482			8,262			482
Other operating expense, net	478			123			1,220			1,334
	572,818			546,062			1,123,395			1,091,194
Operating profit	49,641			61,372			81,529			100,954
Interest expense	(27,868		)	(29,171		)	(57,083		)	(59,897		)
Loss on early extinguishment of debt	—			(26,197		)	—			(26,197		)
Other income, net	189			482			402			765
Income from continuing operations before income taxes	21,962			6,486			24,848			15,625
Provision for income taxes	(8,965		)	(2,411		)	(9,713		)	(3,399		)
Income from continuing operations	12,997			4,075			15,135			12,226
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes	3,672			5,300			2,559			(5,411		)
Loss on disposal of discontinued operations, net of income tax benefit	(3,780		)	—			(3,780		)	—
Net (loss) income from discontinued operations	(108		)	5,300			(1,221		)	(5,411		)
Net income	$	12,889		$	9,375		$	13,914		$	6,815

See accompanying notes to condensed consolidated financial statements.

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



	Six Months Ended
	July 3, 2011			July 4, 2010
	(Unaudited)
Cash flows from operating activities:
Net income	$	13,914		$	6,815
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	81,745			90,338
Net receipt of deferred vendor incentives	19,764			19,676
Impairment of long-lived assets	9,820			14,015
Tax sharing payable to parent, net	6,715			980
Distributions received from joint venture	6,501			5,793
Share-based compensation provision	6,162			6,227
Accretion of long-term debt	4,163			11,015
Non-cash rent expense	4,114			4,945
Write-off and amortization of deferred financing costs	3,503			8,836
Provision for doubtful accounts	1,568			3,576
Deferred income tax benefit, net	(118		)	(3,433		)
Other operating transactions with parent	(1,097		)	(1,505		)
Equity in earnings in joint ventures, net	(5,100		)	(4,480		)
Tax sharing payment to parent	(13,078		)	—
Other, net	(1,352		)	71
Changes in operating assets and liabilities:
Accounts and notes receivable	(5,609		)	(6,767		)
Inventories	(750		)	616
Prepaid expenses and other current assets	(12,226		)	(7,801		)
Accounts payable	14,148			(12,936		)
Accrued expenses and other current liabilities	(7,405		)	(27,537		)
Net cash provided by operating activities	125,382			108,444
Cash flows from investing activities:
Capital expenditures	(55,966		)	(52,730		)
Business acquisitions	(6,613		)	—
Investment in international joint venture	(1,183		)	—
Proceeds from dispositions	2,565			4,111
Other, net	(225		)	876
Net cash used in investing activities	(61,422		)	(47,743		)
Cash flows from financing activities:
Proceeds from long-term debt	—			497,661
Repayments of long-term debt	(33,981		)	(458,576		)
Dividends paid to parent	—			(443,700		)
Deferred financing costs	(36		)	(14,375		)
Net cash used in financing activities	(34,017		)	(418,990		)
Net cash provided by (used in) operations before effect of exchange rate changes on cash	29,943			(358,289		)
Effect of exchange rate changes on cash	1,200			(262		)
Net increase (decrease) in cash and cash equivalents	31,143			(358,551		)
Cash and cash equivalents at beginning of period	198,686			538,864
Cash and cash equivalents at end of period	$	229,829		$	180,313

Table of Contents

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(In Thousands)



	Six Months Ended
	July 3, 2011			July 4, 2010
	(Unaudited)
Detail of cash and cash equivalents at end of period:
Cash and cash equivalents of continuing operations	$	222,753		$	180,313
Cash and cash equivalents of discontinued operations	7,076			—
	$	229,829		$	180,313

Supplemental cash flow information:
Cash paid during the period for:
Interest	$	60,579		$	66,842
Income taxes, net of refunds	$	5,280		$	6,824

Supplemental non-cash investing and financing activities:
Total capital expenditures	$	57,055		$	56,337
Cash capital expenditures	(55,966		)	(52,730		)
Non-cash capitalized lease and certain sales-leaseback obligations	$	1,089		$	3,607

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(1) Basis of Presentation

On July 5, 2011, and as a result of the sale of Arby’s Restaurant Group, Inc. (“Arby’s”) as discussed in Note 2, Wendy’s/Arby’s Group, Inc. changed its name to The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company”) and Wendy’s/Arby’s Restaurants, LLC, a 100% owned subsidiary of The Wendy’s Company, changed its name to Wendy’s Restaurants, LLC (“Wendy’s Restaurants”).

The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company and Wendy’s Restaurants have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments necessary to present fairly our financial position as of July 3, 2011 and the results of our operations for the three months and six months ended July 3, 2011 and July 4, 2010 and our cash flows for the six months ended July 3, 2011 and July 4, 2010. The results of operations for the three months and six months ended July 3, 2011 are not necessarily indicative of the results to be expected for the full 2011 fiscal year. These Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and Wendy’s Restaurants, and combined notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011 (the “Form 10-K”).

Following the sale of Arby’s, The Wendy’s Company and Wendy’s Restaurants (together, the “Companies”) manage and internally report their business in one segment: the operation and franchising of Wendy’s^® restaurants through a wholly owned subsidiary Wendy’s International, Inc. (“Wendy’s”), including its wholesale bakery operations. References herein to The Wendy’s Company corporate (“Corporate”) represent The Wendy’s Company parent company only functions and their effect on the Company’s consolidated results of operations and financial condition.

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. All three month and six month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

(2) Discontinued Operations

On July 4, 2011, Wendy’s Restaurants completed the sale of 100% of the common stock of Arby’s, its wholly owned subsidiary, to ARG IH Corporation (“Buyer”), a wholly owned subsidiary of ARG Holding Corporation (“Buyer Parent”), for $130,000 in cash (subject to customary purchase price adjustments) and 18.5% of the common stock of Buyer Parent (through which Wendy’s Restaurants will indirectly retain an 18.5% interest in Arby’s and the preliminary fair value of which is estimated to be $19,000). Buyer and Buyer Parent were formed for purposes of this transaction. The Buyer also assumed approximately $190,000 of Arby’s debt, consisting primarily of capital lease and sale-leaseback obligations. The sale occurred pursuant to the terms of a Purchase and Sale Agreement by and among Wendy’s Restaurants, Buyer Parent and Buyer dated as of June 13, 2011. In accordance with the Purchase and Sale Agreement, The Wendy’s Company expects to make an election under §338(h)(10) of the Internal Revenue Code, which will have the effect of treating the transaction as a sale of assets and is expected to result in an approximate $240,000 ordinary loss for income tax purposes. If this election were not to be made, the sale of Arby’s common stock would result in a capital loss for income tax purposes.

Wendy’s Restaurants also entered into a Stockholders Agreement with Buyer Parent and ARG Investment Corporation, an entity affiliated with Buyer Parent, which sets forth certain agreements among the parties thereto concerning, among other things, the governance of Buyer Parent and transfer rights, information rights and registration rights with respect to the equity securities of Buyer Parent. In addition, Wendy’s Restaurants entered into a Transition Services Agreement with Buyer, pursuant to which it will provide and be reimbursed for continuing corporate and shared services to Buyer for a limited period of time; such services are currently anticipated to be completed by the end of 2011.

As a result of our sale of Arby’s on July 4, 2011, information related to Arby’s has been reflected in the accompanying condensed consolidated financial statements as follows:


•	Balance sheets - Arby’s assets and liabilities have been aggregated and classified as assets and liabilities of discontinued operations in our July 3, 2011 balance sheet. Arby’s assets and liabilities have not been so reclassified on our January 2, 2011 balance sheet;

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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)


•	Statements of income (loss) - Arby’s income (loss) from operations for all periods presented has been reclassified to discontinued operations (see further discussion below). Discontinued operations also includes our estimated loss on Arby’s disposal; and


•	Statements of cash flows - Arby’s cash flows for all periods presented have been included in, and not separately reported from, all our cash flows.

The Companies do not expect to have continuing operational involvement in Arby’s after the sale and future Arby’s results of operations and cash flows will be eliminated from the Companies’ financial statements. As a result, we classified Arby’s results of operations as discontinued operations for all periods presented. The condensed consolidated statements of income for the three months and six months ended July 3, 2011 and July 4, 2010 include certain indirect corporate overhead costs in “General and administrative,” which for segment reporting purposes had previously been allocated to Arby’s. These indirect corporate overhead costs do not qualify for classification within discontinued operations, and therefore are included in “General and administrative” in continuing operations. Interest expense on Arby’s debt that has been assumed by Buyer is included in discontinued operations; interest expense on Wendy’s Restaurants’ credit agreement, which is not required to be repaid as a result of the sale, continues to be included in “Interest expense” in continuing operations.

The following table details Arby’s revenues and (loss) income from operations which have been reported in discontinued operations:



	Three Months Ended						Six Months Ended
	July 3, 2011			July 4, 2010			July 3, 2011			July 4, 2010
Revenues	$	281,094		$	269,587		$	546,453		$	522,320

(Loss) income from discontinued operations, net of income taxes:
Income (loss) from discontinued operations before income taxes	$	6,472		$	9,386		$	4,279		$	(6,943	)
(Provision for) benefit from income taxes	(2,800		)	(4,086		)	(1,720		)	1,532
	3,672			5,300			2,559			(5,411		)
Loss on disposal, net of income tax benefit	(3,780		)	—			(3,780		)	—
(Loss) income from discontinued operations	$	(108	)	$	5,300		$	(1,221	)	$	(5,411	)

The Companies have recorded an estimated pre-tax loss on disposal of Arby’s of $6,000 in the second quarter of 2011 based upon the preliminary valuation of our indirect retained interest and our current estimates of the transaction closing costs ($11,300) and post closing purchase price adjustments primarily related to working capital ($15,000). Such valuation and estimates are subject to change. The Companies have recognized a $2,220 tax benefit on the estimated pre-tax loss on disposal of Arby’s in the second quarter of 2011. In the third quarter of 2011, due to a permanent difference between the book and tax basis of Arby’s assets related to goodwill, the Companies will record a tax expense of approximately $5,500 in connection with completing the Arby’s sale.

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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The assets and liabilities of Arby’s are classified as assets and liabilities of discontinued operations as of July 3, 2011 as follows:



Cash and cash equivalents	$	7,076
Accounts and notes receivable	22,760
Inventories	10,373
Prepaid expenses and other current assets	15,328
Advertising fund restricted assets	10,788
Current assets of discontinued operations	$	66,325

Properties	$	366,825
Other intangible assets	26,782
Goodwill	17,617
Deferred costs and other assets	7,631
Noncurrent assets of discontinued operations	$	418,855

Current portion of long-term debt	$	9,687
Accounts payable	21,969
Accrued expenses and other current liabilities	68,468
Advertising fund restricted liabilities	10,788
Current liabilities of discontinued operations	$	110,912

Long-term debt	$	180,243
Deferred income	10,968
Other liabilities	54,500
Noncurrent liabilities of discontinued operations	$	245,711

The following table sets forth the effect of the sale of Arby’s on certain information of Wendy’s Restaurants as of January 2, 2011 as disclosed in the combined notes to our consolidated financial statements included in the Form 10-K:



	Applicable to
	Discontinued Operations		Continuing Operations
Total future operating lease commitments:
Rental payments	$	729,940	$	958,872
Rental receipts	33,016		52,516
Future rental receipts on owned properties	24,985		53,907
Pledged assets	325,774		2,557,456
Future purchase and capital commitments:
Beverage agreements	52,301		175,249
Capital expenditures	5,316		12,879

In addition and as a result of the sale, Arby’s guarantees and other commitments as of January 2, 2011 that are separately disclosed in the combined notes to our consolidated financial statements included in the Form 10-K are no longer obligations of the Companies.

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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(3) Acquisitions and Other Dispositions

During the first half of 2011, Wendy’s acquired the operating assets, net of liabilities assumed, of nine Wendy’s franchised restaurants in three separate acquisitions. The total consideration for these acquisitions before post closing adjustments was $7,673 consisting of (1) $6,613 of cash, net of $55 of cash acquired, and (2) the issuance of a note payable of $1,060. The total consideration was allocated to net tangible and identifiable intangible assets acquired, primarily property, and liabilities assumed based on their estimated fair values with the excess of $3,689 recognized as goodwill.

Other restaurant acquisitions and dispositions during the periods presented were not significant.

(4) DFR Notes

(The Wendy’s Company)

On June 9, 2010, pursuant to a March 2010 agreement between the Company and Deerfield Capital Corp. (“DFR”), we received cash proceeds of $31,330, including interest, in consideration for the repayment and cancellation of the series A senior notes (the “DFR Notes”) we received in December 2007 in connection with the sale of Deerfield & Company (the “Deerfield Sale”) to DFR. Additional information on the DFR Notes and the Deerfield Sale is discussed in the Form 10-K. The proceeds represented 64.1% of the $47,986 aggregate principal amount of the DFR Notes.

During the fourth quarter of 2008, we recognized an allowance for collectability of $21,227 to reduce the then carrying amount of the notes to $24,983. As a result, we recognized income of $4,909 during the three months and six months ended July 4, 2010, as the repayment proceeds exceeded the carrying value of the DFR Notes. This gain is included in “Investment income, net.”

(5) Investment in Joint Venture with Tim Hortons Inc.

Wendy’s is a partner in a Canadian restaurant real estate joint venture (“TimWen”) with Tim Hortons Inc. Wendy’s 50% share of the joint venture is accounted for using the equity method of accounting. Our equity in earnings from TimWen is included in “Other operating expense, net.”

Presented below is an unaudited summary of activity related to our portion of TimWen included in our condensed consolidated balance sheets and condensed consolidated statements of income:



	Six Months Ended
	July 3, 2011			July 4, 2010
Balance at beginning of period (a)	$	98,631		$	97,476

Equity in earnings for the period	6,588			5,913
Amortization of purchase price adjustments	(1,371		)	(1,433		)
	5,217			4,480

Distributions received	(6,501		)	(5,793		)
Currency translation adjustment included in “Comprehensive income”	3,990			(592		)
Balance at end of period (a)	$	101,337		$	95,571
_____________________
(a) Included in “Investments.”

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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Presented below is a summary of unaudited financial information of TimWen as of and for the six months ended July 3, 2011 and July 4, 2010, respectively, in Canadian dollars. The summary balance sheet financial information does not distinguish between current and long-term assets and liabilities:



	July 3, 2011		July 4, 2010
Balance sheet information:
Properties	C$	76,837	C$	80,988
Cash and cash equivalents	2,503		1,244
Accounts receivable	5,103		4,258
Other	2,755		3,621
	C$	87,198	C$	90,111

Accounts payable and accrued liabilities	C$	951	C$	1,218
Other liabilities	9,100		8,926
Partners’ equity	77,147		79,967
	C$	87,198	C$	90,111



	Six Months Ended
	July 3, 2011		July 4, 2010
Income statement information:
Revenues	C$	18,985	C$	18,619
Income before income taxes and net income	13,219		12,014

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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(6) Fair Value of Financial Instruments

Below are the carrying amounts and estimated fair values of the Companies’ financial instruments for which the disclosure of fair values is required.



	July 3, 2011
	Wendy’s Restaurants		Corporate		The Wendy’s Company
Financial assets
Carrying Amount:
Cash and cash equivalents	$	222,753	$	269,695	$	492,448
Restricted cash equivalents:
Current - included in “Prepaid expenses and other current assets”	769		—		769
Non-current - included in “Deferred costs and other assets”	3,482		686		4,168
Non-current cost investments	3,792		4,590		8,382
Interest rate swaps	10,493		—		10,493

Fair Value:
Cash and cash equivalents (a)	$	222,753	$	269,695	$	492,448
Restricted cash equivalents (a):
Current	769		—		769
Non-current	3,482		686		4,168
Non-current cost investments (b)	5,596		14,002		19,598
Interest rate swaps (c)	10,493		—		10,493



	July 3, 2011
	Carrying Amount		Fair Value
Financial liabilities
Long-term debt, including current portion:
10% senior notes (d)	$	554,058	$	626,020
Wendy’s Restaurants term loan (d)	468,265		471,662
6.20% senior notes (d)	221,070		233,550
Sale-leaseback obligations (e)	1,488		1,518
Capitalized lease obligations (e)	15,224		15,608
7% debentures (d)	81,771		93,000
Other	1,060		1,073
Total Wendy’s Restaurants long-term debt, including current portion	1,342,936		1,442,431
6.54% aircraft term loan (e)	11,884		11,937
Total The Wendy’s Company long-term debt, including current portion	$	1,354,820	$	1,454,368



Guarantees of:
Franchisee loans obligations (f)	$	362	$	362

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(In Thousands Except Per Share Amounts)

_______________


(a)	The carrying amounts approximated fair value due to the short-term maturities of the cash equivalents or restricted cash equivalents.

(b)

Fair value of these investments was based entirely on statements of account received from investment managers or investees which were principally based on quoted market or broker/dealer prices. To the extent that some of these investments, including the underlying investments in investment limited partnerships, do not have available quoted market or broker/dealer prices, the Companies relied on valuations performed by the investment managers or investees in valuing those investments or third-party appraisals.


(c)	The fair values were based on information provided by the bank counterparties that is model-driven and whose inputs were observable or whose significant value drivers were observable.


(d)	The fair values were based on quoted market prices.


(e)	The fair values were determined by discounting the future scheduled principal payments using an interest rate assuming the same original issuance spread over a current U.S. Treasury bond yield for securities with similar durations.


(f)	Wendy’s provided loan guarantees to various lenders on behalf of franchisees entering into pooled debt facility arrangements for new store development and equipment financing. Wendy’s has accrued a liability for the fair value of these guarantees, the calculation for which was based upon a weighted average risk percentage established at the inception of each program.

The carrying amounts of current accounts, notes receivable and non-current notes receivable approximated fair value due to the effect of related allowances for doubtful accounts and notes receivable. The carrying amounts of accounts payable and accrued expenses approximated fair value due to the short-term maturities of those items.

Valuation techniques under the accounting guidance related to fair value measurements were based on observable and unobservable inputs. Observable inputs reflected readily obtainable data from independent sources, while unobservable inputs reflected our market assumptions. These inputs are classified into the following hierarchy:

Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets.

Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the Companies’ financial assets and liabilities (other than cash and cash equivalents) measured at fair value on a recurring basis as of July 3, 2011 by the valuation hierarchy as defined in the fair value guidance:



			Fair Value Measurements
	July 3, 2011		Level 1		Level 2		Level 3
Interest rate swaps (included in “Deferred costs and other assets”)	$	10,493	$	—	$	10,493	$	—

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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following table presents the fair values for those assets and liabilities of continuing operations measured at fair value during the six months ended July 3, 2011 on a non-recurring basis. Total losses include losses recognized from all non-recurring fair value measurements during the six months ended July 3, 2011. The carrying value of properties presented in the table below substantially represents the remaining carrying value of land for Wendy’s properties that were impaired. See Note 7 for more information on the impairment of our long-lived assets.



									Six Months Ended July 3, 2011 Total Losses
			Fair Value Measurements
	July 3, 2011		Level 1		Level 2		Level 3
Properties	$	575	$	—	$	—	$	575	$	6,449
Other intangible assets	—		—		—		—		1,813
	$	575	$	—	$	—	$	575	$	8,262

Derivative instruments

The Companies’ derivative instruments in the second quarter of 2011 included interest rate swaps with notional amounts totaling $225,000 that were all designated as fair value hedges on Wendy’s 6.20% senior notes. At July 3, 2011 and January 2, 2011, the fair value of these interest rate swaps of $10,493 and $9,623, respectively, has been included in “Deferred costs and other assets” and as an adjustment to the carrying amount of the Wendy’s 6.20% senior notes.

Interest income on interest rate swaps was $1,435 and $2,848 for the three months and six months ended July 3, 2011, respectively and $3,264 and $5,076 for the three months and six months ended July 4, 2010, respectively. In connection with the redemption of the Wendy’s 6.25% senior notes during the second quarter of 2010, we recognized a gain of $1,875 on the cancellation of four interest rate swaps with notional amounts totaling $175,000, which is included in the amounts above for the three months and six months ended July 4, 2010.

(7) Impairment of Long-Lived Assets

Wendy’s company-owned restaurant impairment losses included in the table below for the three months and six months ended July 3, 2011 predominantly reflected impairment charges on restaurant level assets resulting from the deterioration in operating performance of certain restaurants, and additional charges for capital improvements in restaurants impaired in prior years which did not subsequently recover.

These impairment losses represented the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets.” The fair values of impaired assets in the table below were generally estimated based on the present values of the associated cash flows and on market value with respect to land (Level 3 inputs).



	Three Months Ended				Six Months Ended
	July 3, 2011		July 4, 2010		July 3, 2011		July 4, 2010

Impairment of company-owned restaurants:
Properties	$	365	$	75	$	6,449	$	75
Intangible assets	—		407		1,813		407
	$	365	$	482	$	8,262	$	482

Arby’s company-owned restaurant impairment losses of $1,932 and $13,533 for the three months and six months ended July 4, 2010, respectively, predominantly reflected impairment charges on restaurant level assets resulting from the deterioration in operating performance of certain restaurants, and additional charges for capital improvements in restaurants impaired in prior years which did not subsequently recover. These impairment losses represented the excess of the carrying amount over the fair value of the affected assets and are included in discontinued operations.

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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The fair values of impaired assets were generally estimated based on the present values of the associated cash flows and on market value with respect to land (Level 3 inputs). Arby’s impairment losses for the three months and six months ended July 3, 2011 were not significant. See Note 2 for more information on discontinued operations.

(8) Income Taxes

The Company’s effective tax rate for the three months ended July 3, 2011 and July 4, 2010 was 42.2% and 40.6%, respectively. Wendy’s Restaurants effective tax rate for the three months ended July 3, 2011 and July 4, 2010 was 40.8% and 37.2% , respectively. The Companies’ effective tax rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) state income taxes, net of federal income tax benefit and (2) tax credits.

The Company’s effective tax rate for the six months ended July 3, 2011 and July 4, 2010 was 40.2% and 24.8%, respectively. Wendy’s Restaurants effective tax rate for the six months ended July 3, 2011 and July 4, 2010 was 39.1% and 21.8%, respectively. The Companies’ effective tax rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) state income taxes, net of federal income tax benefit, (2) tax credits, and (3) a reduction in our state valuation allowances in 2010.

There were no significant changes to unrecognized tax benefits or related interest and penalties for either the Company or Wendy’s Restaurants for the six month periods ended July 3, 2011 and July 4, 2010.

Amounts payable for Federal and certain state income taxes are settled by Wendy’s Restaurants to The Wendy’s Company under a tax sharing agreement. During the six months ended July 3, 2011 and July 4, 2010, Wendy’s Restaurants made tax sharing payments to Wendy’s of $13,078 and $0, respectively.

As described in Note 2, Wendy’s Restaurants completed the sale of Arby’s on July 4, 2011. In the third quarter of 2011, as a result of the closing of the sale of Arby’s which then affects our state income tax apportionment factors, the Companies expect to record a deferred income tax expense of approximately $5,800.

(9) Income Per Share

(The Wendy’s Company)

Basic income per share for the three months and six months ended July 3, 2011 and July 4, 2010 was computed by dividing net income by the weighted average number of common shares outstanding.

The weighted average number of shares used to calculate basic and diluted income per share was as follows:



	Three Months Ended		Six Months Ended
	July 3, 2011	July 4, 2010	July 3, 2011	July 4, 2010
Common Stock:
Weighted average basic shares outstanding	417,676	425,594	418,098	434,460
Dilutive effect of stock options and restricted shares	1,563	973	1,317	1,068
Weighted average diluted shares outstanding	419,239	426,567	419,415	435,528

Diluted income per share for the three months and six months ended July 3, 2011 and July 4, 2010 was computed by dividing income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and of restricted shares, computed using the treasury stock method. For the three months and six months ended July 3, 2011, we excluded 15,250 and 18,295, respectively, of potential common shares from our diluted per share calculation as they would have had anti-dilutive effects. For the three months and six months ended July 4, 2010, we excluded 15,796 and 16,048, respectively, of potential common shares from our diluted per share calculation as they would have had anti-dilutive effects.

As of July 3, 2011, our potential common shares consisted of the following: (1) outstanding stock options which can be exercised into 31,420 shares of our Common Stock and (2) 4,107 restricted shares of our Common Stock.

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(In Thousands Except Per Share Amounts)

(10) Debt and Equity

Debt

The Wendy’s Restaurants senior secured term loan facility (the “Term Loan”), which is part of the credit agreement entered into in May 2010 and is further described in the Form 10-K, requires prepayments of principal amounts resulting from certain events and on an annual basis from Wendy’s Restaurants excess cash flow as defined under the Term Loan. An excess cash flow payment for fiscal 2010 of $24,874 was paid in the first quarter of 2011. As set forth in the Term Loan, Wendy’s Restaurants currently anticipates that it will not be required to utilize any portion of the proceeds from the sale of Arby’s described in Note 2 as a Term Loan prepayment.

In the second quarter of 2010 the Companies recognized a loss on early extinguishment of debt of $26,197 related to the repayment of debt from the proceeds of the Term Loan as discussed above. This loss consisted of (1) a $14,953 premium payment required to redeem the Wendy’s 6.25% senior notes, (2) $5,477 for the write-off of the unaccreted discount of the Wendy’s 6.25% senior notes (recorded in connection with the Wendy’s merger), and (3) $5,767 for the write-off of deferred costs associated with the repayment of the Wendy’s Restaurants prior senior secured term loan.

Stockholders’ Equity

(The Wendy’s Company)

The following is a summary of the changes in stockholders’ equity:



	Six Months Ended
	July 3, 2011			July 4, 2010
Balance, beginning of year	$	2,163,174		$	2,336,339
Comprehensive income (a)	17,729			5,816
Share-based compensation	6,660			6,651
Exercises of stock options	3,283			923
Dividends paid	(16,750		)	(12,989		)
Repurchases of common stock for treasury	(46,622		)	(167,744		)
Other	(52		)	(512		)
Balance, end of the period	$	2,127,422		$	2,168,484

_______________


(a)	The following is a summary of the components of comprehensive income, net of income taxes:



	Six Months Ended
	July 3, 2011			July 4, 2010
Net income	$	9,857		$	7,342
Net change in currency translation adjustment	7,918			(1,562		)
Net unrealized losses on available-for-sale securities	—			(59		)
Change in net unrecognized pension loss	(46		)	95
Other comprehensive income (loss)	7,872			(1,526		)
Comprehensive income	$	17,729		$	5,816

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(In Thousands Except Per Share Amounts)

Invested Equity

(Wendy’s Restaurants)

The following is a summary of the changes in invested equity:



	Six Months Ended
	July 3, 2011		July 4, 2010
Balance, beginning of year	$	1,776,630	$	2,197,907
Comprehensive income (a)	22,131		5,264
Share-based compensation	6,162		6,227
Dividends paid to The Wendy’s Company	—		(443,700		)
Other	—		(76		)
Balance, end of the period	$	1,804,923	$	1,765,622

_______________


(a)	The following is a summary of the components of comprehensive income, net of income taxes:



	Six Months Ended
	July 3, 2011		July 4, 2010
Net income	$	13,914	$	6,815
Net change in currency translation adjustment	7,918		(1,562		)
Change in net unrecognized pension loss (b)	299		11
Other comprehensive income (loss)	8,217		(1,551		)
Comprehensive income	$	22,131	$	5,264


(b)	Includes the reclassification of the change in net unrecognized pension loss related to Arby’s pension liability to a subsidiary of The Wendy’s Company.

(11) Guarantees and Other Commitments and Contingencies

Except as related to the sale of Arby’s as discussed in Note 2 and as described below, the Companies did not have any significant changes to their guarantees, other commitments and contingencies as disclosed in the combined notes to our consolidated financial statements included in the Form 10-K.

Equipment for Systemwide Core Menu Initiative

In order to facilitate the purchase and related installation of equipment by franchisees required to implement a systemwide core menu initiative, Wendy’s has initiated the following programs:


•	Wendy’s agreed with two lenders to partially subsidize interest rates for loans to qualified franchisees. Wendy’s will be required to pay the full interest subsidy amount in the fourth quarter of 2011. As of July 3, 2011, there is an accrued liability of $356 for the interest subsidy. Wendy’s has no other obligations related to these programs.

•

For franchisees that will otherwise not be able to take advantage of the subsidized interest programs described above, Wendy’s will provide up to an aggregate of $3,000 of loan guarantees under an additional lender program. Wendy’s will have full recourse to its franchisees for any payments Wendy’s may be required to make under this program. As of July 3, 2011, Wendy’s had no guarantees outstanding under this program.

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(In Thousands Except Per Share Amounts)

Loan funding to franchisees under the programs described above must be completed by September 30, 2011. Wendy’s maximum liability under these programs, including the full interest subsidy and the aggregate guaranteed loans which is dependent on the final amounts borrowed by franchisees, is not expected to exceed $5,000.

Breakfast Test Expansion

In order to encourage franchisees to participate in expanded testing of the breakfast daypart, Wendy’s has established the following programs:

•

Wendy’s will continue to lease equipment to franchisees that are testing the breakfast program. At the time breakfast becomes a required program, the franchisees will be required to purchase the equipment from Wendy’s based on its then book value plus installation costs. The total amount of expenditures for equipment (including installation) leased to franchisees is expected to be no more than $7,000.

•

Additionally, Wendy’s will provide loans to certain franchisees for the purchase and installation of equipment required to implement the breakfast program. The loans are expected to not exceed $25 per restaurant, carry no interest charge and be repayable in full 24 months after the installation is completed. Wendy’s will fund a maximum of $20,000 of these loans for early adopters of the breakfast program.

As of July 3, 2011, no loans have been made under the above breakfast program. We have purchased equipment with a current net book value of approximately $1,900 that has been leased to franchisees. The above programs also have the following additional features:

•

For the first three years of an early adopting franchisee’s participation in the breakfast program, a portion of franchise royalties (on a sliding scale) will not be payable to Wendy’s but will be required to be reinvested in local advertising and promotions for the breakfast program. Based on franchisee participation in the breakfast program, Wendy’s estimates the royalties not to be received under this program will approximate $6,000 over the three year period.

•

Contributions otherwise due to Wendy’s National Advertising Program, Inc. (“Wendy’s National Advertising Program”) based on breakfast sales will not be payable to Wendy’s National Advertising Program but will be required to be reinvested in local advertising and promotions for the breakfast program until Wendy’s National Advertising Program begins to purchase national advertising for the breakfast programs.

North America Incentive Program

In order to promote new unit development, Wendy’s has established a franchisee assistance program for its North American franchisees that provides for reduced technical assistance fees and a sliding scale of royalties for the first two years of operation for qualifying locations opened between April 1, 2011 and December 31, 2013. While we are unable to project the number of locations to be opened under this program, we do not expect the effect on current or future franchise revenues to be material.

Canadian Lease Guarantee Program

Wendy’s Canadian subsidiary has established a lease guarantee program, which is to promote new unit development, for its Canadian franchisees for up to an aggregate of C$5,000 for periods of up to five years. Franchisees pay the Canadian subsidiary a nominal fee for the guarantee. As of July 3, 2011, the Canadian subsidiary had guaranteed C$249 under this program.

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THE WENDY’S COMPANY AND SUBSIDIARIES

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(12) Transactions with Related Parties

The following is a summary of ongoing transactions between the Companies and their related parties which are included in continuing operations and includes any updates and amendments since those reported in the Form 10-K:



	Six Months Ended
	July 3, 2011			July 4, 2010
SSG agreement (a)	$	(2,275	)	$	4,900
Subleases with related parties (b)	(82		)	(64		)
Advisory fees (c)	—			2,465

(The Wendy’s Company)
Advisory fees (c)	$	500		$	500
Sublease income (d)	(818		)	(823		)
Executive use of corporate aircraft (e)	(60		)	(60		)
Liquidation services agreement (f)	220			220

___________________

Transactions with Purchasing Cooperatives

(a)

As agreed by its board of directors in March 2011, effective April 2011 the activities of Strategic Sourcing Group Co-op, LLC (“SSG”) were transferred to the Wendy’s independent purchasing cooperative, Quality Supply Chain Co-op (“QSCC”), and Arby’s independent purchasing cooperative (“ARCOP”), which, following the sale of Arby’s, is no longer a related party. Wendy’s Restaurants had committed to pay approximately $5,145 of SSG expenses, of which $4,900 was expensed in the first quarter of 2010, and was to be paid over a 24 month period through March 2012. During the first quarter of 2011, the remaining accrued commitment of $2,275 was reversed and credited to “General and administrative.”


(b)	Wendy’s and QSCC entered into a sublease amendment, effective January 1, 2011, which increased the office space subleased to QSCC to 14,333 square feet for a one year period for a revised annual base rental of $176 with five one-year renewal options.

The Companies received $23 and $8 of sublease income from SSG and $59 and $56 of sublease income from QSCC during the first six months of 2011 and 2010, respectively.

Transactions with the Management Company


(c)	The Companies paid approximately $2,465 in the second quarter of 2010 in fees for corporate finance advisory services in connection with the negotiation and execution of the Wendy’s Restaurants credit agreement.

In addition, The Wendy’s Company incurred service fees of $500 in the first six months of 2011 and 2010, which are included in “General and administrative.”

These fees were paid to a management company (the “Management Company”) which was formed by our Chairman, who was our former Chief Executive Officer, and our Vice Chairman, who was our former President and Chief Operating Officer, and a director, who was our former Vice Chairman, in connection with a services agreement which expired on June 30, 2011.


(d)	The Wendy’s Company recognized income of $818 and $823 from the Management Company under subleases, which expire in May 2012, for office space on two of the floors of the Company’s former New York headquarters for the first six months of 2011 and 2010, respectively, which has been recorded as a reduction of “General and administrative.”

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THE WENDY’S COMPANY AND SUBSIDIARIES

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(e)

On June 29, 2011, The Wendy’s Company and TASCO, LLC, an affiliate of the Management Company, entered into an agreement to extend an aircraft lease agreement for an additional one year period (expiring on June 30, 2012) for an increased monthly rent of $13. Under the extended lease agreement, TASCO, LLC continues to be responsible for operating costs related to the aircraft’s usage. The Wendy’s Company received lease income of $60 in the first half of 2011 and 2010, which is included as an offset to “General and administrative.”

We intend to dispose of the Company-owned aircraft leased under the lease agreement discussed above as soon as practicable. As of July 3, 2011, the aircraft has a carrying value that approximates its fair value, is classified as held-for-sale, and is included in “Prepaid expenses and other current assets.”


(f)	The Wendy’s Company paid the Management Company a fee of $900 in two installments in June 2009 and 2010, which was deferred and amortized through its June 30, 2011 expiration date for assistance in the sale, liquidation, or other disposition of certain of our investments. $220 was amortized and recorded in “General and administrative” in the first six months of 2011 and 2010.

(Wendy’s Restaurants)

The following is a summary of continuing transactions between Wendy’s Restaurants and The Wendy’s Company:



	Six Months Ended
	July 3, 2011		July 4, 2010
Dividends paid (g)	$	—	$	443,700
Other transactions:
Payments for Federal and state income tax (h)	13,078		—
Share-based compensation (i)	4,961		4,470
Expense under management service agreements (j)	2,521		2,509

_____________________


(g)	Wendy’s Restaurants paid cash dividends to The Wendy’s Company which were charged to “Invested equity.”


(h)	Wendy’s Restaurants made cash payments to The Wendy’s Company under a tax sharing agreement, as discussed in more detail in Note 8.


(i)	Wendy’s Restaurants incurs share based compensation costs for The Wendy’s Company Common Stock awards issued to certain employees under The Wendy’s Company various equity plans. Such compensation cost is allocated by The Wendy’s Company to Wendy’s Restaurants and is correspondingly recorded as capital contributions from The Wendy’s Company.


(j)	Wendy’s Restaurants incurred $2,521 and $2,509 for management services during the first six months of 2011 and 2010, respectively. Such fees are included in “General and administrative” and are settled through Wendy’s Restaurants’ intercompany account with The Wendy’s Company.

As a result of the sale of Arby’s, Arby’s and its affiliates are no longer considered related parties. Prior to the sale, the transactions between Arby’s and its non-consolidated affiliates were not material.

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THE WENDY’S COMPANY AND SUBSIDIARIES

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(13) Legal and Environmental Matters

We are involved in litigation and claims incidental to our current and prior businesses. We provide reserves for such litigation and claims when payment is probable and reasonably estimable. As of July 3, 2011, Wendy’s Restaurants had reserves for continuing operations for all of its legal and environmental matters aggregating $3,164, which are included in the total $3,193 accrued for continuing operations by The Wendy’s Company for all legal and environmental matters. We cannot estimate the aggregate possible range of loss due to most proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur, and significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions are thus inherently difficult. Based on currently available information, including legal defenses available to us, and given the aforementioned reserves and our insurance coverage, we do not believe that the outcome of these legal and environmental matters will have a material effect on our consolidated financial position or results of operations.

(14) Retention Program and Other Transaction Related Costs

During the three months and six months ended July 3, 2011, Wendy’s Restaurants incurred “Retention program and other transaction related costs” of $4,692 and $5,971, which are included in the total $5,039 and $6,923, both respectively, incurred by The Wendy’s Company for an employee retention program resulting from our strategic alternatives announcement regarding Arby’s, the elimination of a senior executive position and certain other professional fees. During the third quarter of 2011, the Companies will incur additional costs of approximately $5,100 under the retention program which were contingent upon the closing of the sale of Arby’s. Additional retention payments aggregating $700 to two corporate executives will be incurred in the third quarter of 2011 and will be expensed over the related service periods of six and nine months.

In the third quarter of 2011, the Companies will incur $1,780 in bonus costs upon the closing of the sale of Arby’s and will recognize $1,073 in compensation costs for accelerated vesting of stock options and restricted stock ($683 of such bonus costs and $891 of such compensation costs will be included in discontinued operations). In addition, we anticipate we will incur (i) employee relocation costs of approximately $2,400 related to the relocation of our corporate offices during the second half of 2011 and (ii) compensation costs of $1,500 due to the relocation of a corporate executive anticipated to take place during the third quarter of 2011 which, in accordance with its terms, will be expensed over the three year period following this executive’s relocation.

(15) Accounting Standards Not Yet Adopted

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued amendments which provide additional guidance about how fair value should be determined under existing standards and expands existing disclosure requirements for certain fair value measurements. The purpose of these amendments is to improve and converge International Financial Reporting Standards and GAAP. The guidance is effective commencing with our 2012 fiscal year. We do not expect adoption of this amendment to have a material effect on our consolidated financial statements.

In June 2011, the FASB issued an amendment that requires companies to present comprehensive income in either a single statement or two consecutive statements reporting net income and other comprehensive income. The purpose of this amendment is to increase the prominence of other comprehensive income in financial statements. The guidance is effective commencing with our 2012 fiscal year. The guidance affects only the presentation of comprehensive income and does not change the composition or calculation of comprehensive income.

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THE WENDY’S COMPANY AND SUBSIDIARIES

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(16) Guarantor/Non-Guarantor

(Wendy’s Restaurants)

Wendy’s Restaurants is the issuer of, and certain of its domestic subsidiaries have guaranteed amounts outstanding under our 10% senior notes. Each of the guaranteeing subsidiaries, including Arby’s and its subsidiaries through the closing of the sale on July 4, 2011, is a direct or indirect 100% owned subsidiary of Wendy’s Restaurants and each has fully and unconditionally guaranteed the 10% senior notes on a joint and several basis. Information related to Arby’s has been reflected as discontinued operations in the accompanying condensed consolidating balance sheet as of July 3, 2011 and condensed consolidating statements of income for the three months and six months ended July 3, 2011 and July 4, 2010. Arby’s cash flows for all periods presented have been included in, and not separately reported from, all our cash flows.

The following are included in the presentation of our consolidating: (1) Condensed Consolidating Balance Sheets as of July 3, 2011 and January 2, 2011, (2) Condensed Consolidating Statements of Income for the three months and six months ended July 3, 2011 and July 4, 2010, and (3) Condensed Consolidating Statements of Cash Flows for the six months ended July 3, 2011 and July 4, 2010 to reflect:

(a)Wendy’s Restaurants (the “Parent”);

(b)the 10% senior notes guarantor subsidiaries as a group;

(c)the 10% senior notes non-guarantor subsidiaries as a group;

(d)elimination entries necessary to combine the Parent with the guarantor and non-guarantor subsidiaries; and

(e)Wendy’s Restaurants on a consolidated basis.

Substantially all of our domestic restricted subsidiaries are guarantors of the 10% senior notes. Certain of our subsidiaries, including our foreign subsidiaries and national advertising funds, do not guarantee the 10% senior notes.

As a result of the closing of the sale of Arby’s on July 4, 2011 as described in Note 2, Arby’s and its subsidiaries are no longer guarantors of the amounts outstanding under the 10% senior notes. Accordingly, condensed consolidating financial statements contained in our future periodic filings will be retroactively revised to reflect Arby’s and its subsidiaries as non-guarantors for all periods presented.

For purposes of presentation of such consolidating information, investments in subsidiaries are accounted for by the Parent on the equity method. The elimination entries are principally necessary to eliminate intercompany balances and transactions.

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THE WENDY’S COMPANY AND SUBSIDIARIES

WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

CONDENSED CONSOLIDATING BALANCE SHEET

July 3, 2011



			Guarantor		Non-guarantor
	Parent		Subsidiaries		Subsidiaries		Eliminations			Total
ASSETS
Current assets:
Cash and cash equivalents	$	36,255	$	152,938	$	33,560	$	—		$	222,753
Accounts and notes receivable	3,677		61,896		4,491		(12		)	70,052
Inventories	—		11,963		1,201		—			13,164
Prepaid expenses and other current assets	4,720		26,479		1,590		—			32,789
Deferred income tax benefit	22,127		20,926		223		—			43,276
Advertising funds restricted assets	—		—		74,472		—			74,472
Current assets of discontinued operations	—		65,246		1,079		—			66,325
Total current assets	66,779		339,448		116,616		(12		)	522,831
Properties	11,477		1,070,660		59,430		—			1,141,567
Goodwill	—		827,228		50,415		—			877,643
Other intangible assets	18,973		1,272,425		26,844		—			1,318,242
Investments	—		—		106,195		—			106,195
Deferred costs and other assets	29,222		36,754		269		—			66,245
Noncurrent assets of discontinued operations	—		396,214		22,641		—			418,855
Net investment in subsidiaries	2,624,049		260,047		—		(2,884,096		)	—
Deferred income tax benefit	83,496		—		—		(83,496		)	—
Due from affiliate	51,593		—		—		(51,593		)	—
Total assets	$	2,885,589	$	4,202,776	$	382,410	$	(3,019,197	)	$	4,451,578

LIABILITIES AND INVESTED EQUITY
Current liabilities:
Current portion of long-term debt	$	5,692	$	909	$	280	$	—		$	6,881
Accounts payable	4,884		49,786		6,404		—			61,074
Accrued expenses and other current liabilities	47,757		139,103		7,417		—			194,277
Advertising funds restricted liabilities	—		—		74,472		—			74,472
Current liabilities of discontinued operations	—		110,636		288		(12		)	110,912